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Tuesday, June 21, 2011

An Introduction to Porter's Generic Strategies

This post provides a basic summary of Porter's competitive strategies.

According to Porter (1980), a firm must decide whether to attempt to gain competitive advantage by producing at a lower cost than its rivals or differentiate its products and services and sell them at a premium price. Then, the firm must decide whether to target the whole market (broad) with its chosen strategy or to target a niche (narrow) market. A broad strategy targets many markets and a disparate cross-section of customers, and a narrow scope of highly focused strategies may target a very small number of segments (possibly just one). Porter's framework is given in the following diagram.

Figure: Porter’s (1980) Model of Generic Strategies

If a company wishes to pursue the strategy of cost leadership, it has to be the low cost producer (Porter, 1980). A firm may gain cost advantage through economies of scale, proprietary technology, cheap raw material, etc. Organisations that achieve cost leadership can benefit either by gaining market share through lowering prices (whilst maintaining profitability,) or by maintaining average prices and therefore increasing profits (Porter, 1980). All of this is achieved by reducing costs to a level below those of the organisation's competitors.

The strategy of differentiation involves offering a different product, a different delivery system, or using a different marketing approach (Porter, 1980). And it is up to the management of the company to decide which factors it wants to emphasise in order to gain competitive advantage (Porter, 1985). Companies that pursue a differentiation strategy win market share by offering unique features that are valued by their customers (Porter, 1980).

The third strategy, focus is when a firm chooses a narrow segment within its industry and tailors its offerings (strategy) to that segment (Porter, 1980). Focus strategies involve achieving cost leadership or differentiation within niche markets in ways that are not available to more broadly-focused players.

Finally, Porter labels firms that follow each generic strategy, but do not achieve any of them as "stuck in the middle". Porter asserted that the three strategies were distinct mutually exclusive alternatives. He argued that firms may be able to successfully pursue more than one of these strategies simultaneously, but "this is rarely possible." (Porter, 1980: 35). A firm which failed to follow one of the strategies was "stuck in the middle," which guaranteed the firm low profitability.

Finally, the following table shows a summarised analysis of each generic strategy in relation to ways of achieving each one and the resource and organisational requirements for them. Each strategy is unique and thus according to Porter (1980, 1985) there are differences in terms of their key elements. In future posts I will expand further each strategy.

Generic strategy

Key strategy elements

Resource & organisational requirements

Ways to achieve the strategy

Cost Leadership

·Investment in scale-efficient plant

·Design of products for ease of manufacture

·Control of overheads

·R&D

·Avoidance of marginal customer accounts

·Sustained Capital Investment & Access to Capital

·Products Designed for Ease in Manufacture

·Access to capital

·Process engineering skills

·Tight cost control

·Structured organisation & responsibilities

·Incentives related to quantitative targets

·Intense Supervision of Labour

·Low-Cost Distribution System

·Frequent, Detailed Control Reports

·Incentives Based on Meeting Strict Quantitative Targets

·Size & Economies of scale

·Simplification of design

·Labour effectiveness

·Tight cost control in all business activities

·Close relationships with suppliers

·Cost linkages

·Integration

·Timing

·Use of technology for cost reductions

Differentiation

·Emphasis on branding and brand advertising

·Design

·Service

·Quality

·Corporate Reputation for Quality of Technological Leadership

·Long Tradition in the Industry or Unique Combination of Skills Drawn from Other Businesses

·Innovation

·Promotional Activity

·Strong Marketing Abilities

·Product engineering skills

·Creative Flair

·Strong Capability in Basic Research

·Strong Co-operation from Channels

·Strong co-operation among functions in R&D, Product Development, and Marketing

·Subjective Measurement & Incentives Instead of Quantitative Measures

·Amenities to attract High Skilled Labour, Scientists or Creative People

·Higher service levels

·Greater flexibility

·Effective distribution

·Extensive product range

·Additional features and functionality

·Focused relationship building

·Differentiation linkages

·Quality

·Integration

·Timing

·Use of technology for differentiation advantages

Focus

·Combination of the above strategic elements directed at the particular segment

·Combination of the above policies directed at the particular strategic target